Reserving and Pricing in Liability Insurance by alicejenny

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									Reserving and Pricing in Liability
Insurance



2nd International Istanbul Insurance Conference
30 September 2010




Prepared by Thomas Cordier, FCAS, FIA
Aon Benfield Analytics
Key Message




     Investing in strong technical capabilities now is
     critical for future success




Reserving and Pricing in Liability Insurance | Thomas Cordier
International Istanbul Insurance Conference | 30 September 2010   1
Agenda
Section 1                                          Some facts about the Turkish liability market
Section 2                                          Playing by the rules
Section 3                                          Summary




Reserving and Pricing in Liability Insurance | Thomas Cordier
International Istanbul Insurance Conference | 30 September 2010                             2
Agenda
Section 1                                          Some facts about the Turkish liability market
Section 2                                          Playing by the rules
Section 3                                          Summary




Reserving and Pricing in Liability Insurance | Thomas Cordier
International Istanbul Insurance Conference | 30 September 2010                             3
Some Facts about the Turkish Liability Market

                                                    Non-Life Gross Written Premium 2009
                                                                  (000 TL)

                                                                                              AXA, 1,277
                                               Other (22
                                              companies),
                                                 2,263

                                                                                                                  ANADOLU,
                                                                                                                    1,243
                                           MAPFRE
                                          GENEL, 361
                                     EUREKO, 539                                                               ALLIANZ, 931


                                            GROUPAMA,
                                               590
                                                                                                     AKSIGORTA,
                                                YAPI KREDI,                                               851
                                                    608                   ERGO, 676             GUNES, 727

                                                                  Source: Turkish Treasury, Insurance Supervision Board
Reserving and Pricing in Liability Insurance | Thomas Cordier
International Istanbul Insurance Conference | 30 September 2010                                                           4
Some Facts about the Turkish Liability Market
Growth of non-life business
                            Non-life Premium Production of the last 5 years

          TL million
                 12.000                                                                                                               30

                 10.000                                                                                                               25

                    8.000                                                                                                             20




                                                                                                                                           %
                    6.000                                                                                                             15

                    4.000                                                                                                             10

                    2.000                                                                                                             5
                              0                                                                                                       0
                                             2005                        2006                2007                 2008         2009
                                                                                             Years

                                                                              premiums                      increase

                                                                  Source: Turkish Treasury, Directorate General of Insurance
Reserving and Pricing in Liability Insurance | Thomas Cordier
International Istanbul Insurance Conference | 30 September 2010                                                                5
Some Facts about the Turkish Liability Market
How much can the Turkish market continue to grow?

  Country                                                  P&C GWP ($B)    GDP ($B)        Premium/GDP
  U.S.                                                            462.33   14,256.30          3.2%
  U.K.                                                             71.93    2,174.53          3.3%
  Germany                                                          67.10    3,346.70          2.0%
  France                                                           62.66    2,649.39          2.4%
  Italy                                                            44.09    2,112.78          2.1%
  Spain                                                            33.08    1,460.25          2.3%
  Russia                                                           12.48    1,230.76          1.0%
  Austria                                                           9.13      384.91          2.4%
  Poland                                                            5.89      430.08          1.4%
  Turkey                                                            5.61      617.10          0.9%

Reserving and Pricing in Liability Insurance | Thomas Cordier
International Istanbul Insurance Conference | 30 September 2010                        6
Some Facts about the Turkish Liability Market

                                     Profitability of insurance companies over the last 5 Years

                 10.000,00                                                                                                         15
                  9.000,00                                  equity                 profit             roe
                  8.000,00
    TL million




                  7.000,00
                                                                                                                                   10
                  6.000,00




                                                                                                                                        %
                  5.000,00
                  4.000,00
                                                                                                                                   5
                  3.000,00
                  2.000,00
                  1.000,00
                      0,00                                                                                                         0
                                             2005                     2006                  2007                 2008       2009
                                                                                            years
                                                          Source: Turkish Treasury, Directorate General of Insurance

Reserving and Pricing in Liability Insurance | Thomas Cordier
International Istanbul Insurance Conference | 30 September 2010                                                         7
Some Facts about the Turkish Liability Market
Recent events affecting liability lines in Turkish Liability lines

 Amendment of reserve regulation (2008)

 High inflation levels (CPI circa 10% since 2005, was much higher previously)

 Use of tariffs or regulator approval in a number of lines of business

 Medical Malpractice reform (July 2010)

 New reserving guidelines (expected in late 2010)

 MTPL limits have increased to TL 175,000 ( March 2010)- further increase to
  TL 200,000 (January 2011)
Reserving and Pricing in Liability Insurance | Thomas Cordier
International Istanbul Insurance Conference | 30 September 2010   8
Agenda
Section 1                                          Some facts about the Turkish liability market
Section 2                                          Playing by the rules
Section 3                                          Summary




Reserving and Pricing in Liability Insurance | Thomas Cordier
International Istanbul Insurance Conference | 30 September 2010                             9
Playing by the rules
Actuarial drivers of reserving and pricing

Recent developments
 Increase in case reserve level for large liability claims observed in a number
  of Central and Eastern Europe countries
 High inflation
 Increase in MTPL limits
 New reserving requirements
Impact: make projections more uncertain, actuaries increase ultimates.
  Reinsurers have already responded by increasing rates heavily.

Are we going to see an increase in reserves for primary insurers?
Have reinsurers over-reacted to these changes?

Reserving and Pricing in Liability Insurance | Thomas Cordier
International Istanbul Insurance Conference | 30 September 2010   10
Playing by the rules
Regulatory constraints

Tariffs
 Write liability lines at an unprofitable rate (legal minimum) may make sense
  because it allows cross-selling opportunities
 How to identify customers who are genuinely profitable overall and those
  who aren’t?
 Generalized Linear Models (GLM) combined with good underwriting
  standards provide a way of monitoring expected gains/loss per insured by
  line and overall.

In the long run, companies with the most advanced rating system will
  end-up writing more “good risks”, leaving less profitable risks to their
  competitors (anti-selection). This remains true even in the presence of
  tariffs.
Reserving and Pricing in Liability Insurance | Thomas Cordier
International Istanbul Insurance Conference | 30 September 2010   11
Playing by the rules
Risk Management and Internal Model

Capital
 Overall worldwide trend towards more disclosure and a better understanding
  of risk (e.g.: Solvency II in Europe, Solvency Modernization Initiative in US)
 Lack of consistency within a company may lead to:
  – Deteriorating underwriting results
  – Increased volatility in earnings
  – Increased regulatory capital requirements

Companies with an embedded internal capital model and a coherent risk
 management framework will be better equipped than others to face
 future uncertainty.

Reserving and Pricing in Liability Insurance | Thomas Cordier
International Istanbul Insurance Conference | 30 September 2010   12
Playing by the rules
Reinsurance to support growth and reduce volatility of earnings

Formulating a risk appetite that can flow down to all areas of the business
 Use of proportional reinsurance can help support growth
 As capital is built-up, shift to non-proportional reinsurance to cede less profit
  and reduce volatility of earnings
 Insurers also benefit from brokers and reinsurer’s technical expertise

Internal Model helps optimize reinsurance program and it ensures that
  your company receives sufficient capital credit for your reinsurance
  program




Reserving and Pricing in Liability Insurance | Thomas Cordier
International Istanbul Insurance Conference | 30 September 2010   13
Playing by the rules
Reinsurance to manage capital
     450,0

     400,0
                                                                       Capital relief
     350,0                                                             through
                                                                       reinsurance
     300,0

     250,0

     200,0

     150,0
                                                                           Available

     100,0                                                                 Required

       50,0

         0,0




Reserving and Pricing in Liability Insurance | Thomas Cordier
International Istanbul Insurance Conference | 30 September 2010   14
Agenda
Section 1                                          Some facts about the Turkish liability market
Section 2                                          Playing by the rules
Section 3                                          Summary




Reserving and Pricing in Liability Insurance | Thomas Cordier
International Istanbul Insurance Conference | 30 September 2010                            15
Summary


 The Turkish liability market is going through a period of great changes
 Even in the presence of tariffs companies can select the best risks by using
  GLM and a strong underwriting process
 An embedded risk management process and a well-designed internal model
  will help optimize capital
 Reinsurance is a great tool to align a company’s exposure to its risk appetite,
  manage capital and reduce earnings volatility



Companies that invest in strong analytical capabilities now will gain a
 decisive competitive advantage for the next few years


Reserving and Pricing in Liability Insurance | Thomas Cordier
International Istanbul Insurance Conference | 30 September 2010   16
Contact List
Thomas Cordier, FCAS, FIA
Aon Benfield London
Analytics
+44 207 522 8244
thomas.cordier@aonbenfield.com


Müge Diren
Aon Benfield Istanbul
Senior Account Executive
+90.212.282.7100
muge.diren@aonbenfield.com




Reserving and Pricing in Liability Insurance | Thomas Cordier
International Istanbul Insurance Conference | 30 September 2010   17

								
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